You have to be very careful about what property that you own, if you file a chapter 7 bankruptcy. There is a "liquidation" or chatper 7 trustee appointed by the Bankruptcy Court immediately upon the filing of a chapter 7 case. They are usually attorneys or accountants (they don't have to be), but they are very interested in finding assets that they can use to pay your creditors with, after deducting a statutory commission, of course.

Anyway, in this case the debtor Mr. Daley had to file bankruptcy, but he had $66,000 in an IRA at Merrill Lynch. He had signed an account agreement that gave Merrill Lynch a lien on the funds, in case he owed them money, which he did not. He never borrowed money from them. The chapter 7 trustee argued to the bankruptcy court that this pledge agreement violated IRS rules, such that the IRS was no longer exempt. He won. And the district court on appeal, affirmed. Mr. Daley was about to lose all his IRA money.

Finally, Daley appealed to the 6th Circuit Court of Appeals, and they reversed the other courts, and ruled that the IRA was safe. The 6th Circuit held:

In the final analysis, Mostoller has not rebutted the statutory presumption that Daley’s retirement account is exempt from bankruptcy. Daley signed a boilerplate lien provision as a requirement of opening an account that the IRS had approved. He made no other transactions with the account, and because he opened no other accounts there was no possibility that the lien would amount to anything. The agency with ultimate authority to administer § 4975, the Department of Labor, has given no definitive interpretation of § 4975 in this context. And the agency that shares enforcement authority over § 4975, the IRS, has determined it will consider accounts like Daley’s exempt. On this record, Daley did not use his retirement account to extend himself credit.

So, while this decision is not binding her in the 5th Circuit, I believe it is good law. Just don't actually borrow money from an IRA, or you probably do render it "non-exempt" and subject to being seized by your creditors or a bankruptcy trustee.

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